MANNKIND CORP 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Statements in this report that are not strictly historical in nature are “forward-looking statements” within the meaning of the federal securities laws made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. In some cases, you can identify forward-looking statements by terms such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “goal,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “will,” “would,” and similar expressions intended to identify forward-looking statements, though not all forward-looking statements contain these identifying words. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth below in Part II, Item 1A Risk Factors and elsewhere in this Quarterly Report on Form 10-Q. The preceding interim condensed consolidated financial statements and this Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the financial statements and related notes for the year ended December 31, 2020 and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in the Annual Report. Readers are cautioned not to place undue reliance on forward-looking statements. The forward-looking statements speak only as of the date on which they are made, and we undertake no obligation to update such statements to reflect events that occur or circumstances that exist after the date on which they are made. OVERVIEW We are a biopharmaceutical company focused on the development and commercialization of inhaled therapeutic products for endocrine and orphan lung diseases. Our lead product, is Afrezza (insulin human) Inhalation Powder, an ultra rapid-acting inhaled insulin indicated to improve glycemic control in adults with diabetes, which was approved by the FDA in June 2014. Since September 2018, we have been collaborating with United Therapeutics to develop an inhaled formulation of treprostinil known as Tyvaso DPI. In April 2021, United Therapeutics submitted an NDA for Tyvaso DPI to the FDA. United Therapeutics has applied a priority review voucher to the NDA that could provide for an FDA decision by December 2021. The FDA must first accept the application for review and issue a formal review goal date in accordance with the Prescription Drug User Fee Act. Our business is subject to significant risks, including but not limited to our ability to commercialize Afrezza successfully, our ability to manufacture sufficient quantities of Afrezza and Tyvaso DPI and our potential need to raise additional capital to fund our operations. Other significant risks also include the risks inherent in drug development, clinical trials and the regulatory approval process for our product candidates, which in some cases depends upon the efforts of our partners. We continue to manage the risk to our business posed by the global COVID-19 pandemic. Our sales representatives have resumed in-person sales calls to the extent permitted by state and local public health authorities and by the policies of individual healthcare providers on their call lists. Our offices in California and Connecticut have remained open for essential personnel and, as public health orders allow, have reopened to non-essential personnel, although many employees continue to work from home for a portion of each workweek. Although our productivity has been impacted by the global pandemic, we have suitably adapted to the changed business environment that now exists. The impact of the COVID-19 pandemic continues to be uncertain. We do not yet know the full extent of potential delays or impacts on our business, our collaboration arrangements, commercialization efforts, healthcare systems or to the global economy as a whole. The COVID-19 pandemic has the potential to have additional adverse impacts on our operations. We will continue to monitor the COVID-19 situation closely. As of March 31, 2021, we had an accumulated deficit of $3.1 billion and a stockholders’ deficit of $173.6 million. We had net loss of $12.9 million for the three months ended March 31, 2021. To date, we have funded our operations through the sale of convertible debt securities and equity, from the receipt of upfront and milestone payments from certain collaborations, and from borrowings under certain loan arrangements and also from the sale of Afrezza. CRITICAL ACCOUNTING POLICIES Our critical accounting policies can be found in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Form 10-K for the year ended December 31, 2020. See Note 1 – Description of Business and Significant Accounting Policies in the condensed consolidated financial statements included in Part I – Financial Statements (Unaudited) for descriptions of the new accounting policies and impact of adoption. 28 RESULTS OF OPERATIONS Three months ended March 31, 2021 and 2020 Revenues The following tables provide a comparison of the revenue categories for the three months ended March 31, 2021 and 2020 (dollars in thousands): Three Months Ended March 31, 2021 2020 $ Change % Change Net revenue — commercial product sales: Gross revenue from commercial product sales $ 13,610 $ 13,931 $ (321 ) (2 %) Wholesaler distribution fees, rebates and chargebacks, product returns and other discounts (5,511 ) (5,931 ) $ (420 ) (7 %) Net revenue — commercial product sales 8,099 8,000 $ 99 1 % Revenue — collaborations and services 9,337 8,235 $ 1,102 13 % Total revenues $ 17,436 $ 16,235 $ 1,201 7 % Gross revenue from the sales of Afrezza decreased by $0.3 million, or 2%, for the three months ended March 31, 2021 compared to the same period in the prior year. The decrease reflects the absence of stockpiling of Afrezza during the first quarter of 2021 in contrast to the same period last year when there was a noticeable increase in prescription refills as lockdowns began to be imposed across the country in response to the emerging COVID-19 pandemic. The gross-to-net adjustment was $5.5 million (or 40% of gross revenue) for the three months ended March 31, 2021, compared to $5.9 million (or 43% of gross revenue) for the same period in the prior year. The decrease of $0.4 million was primarily driven by a decrease in accounting estimates for wholesaler distribution fees and prompt pay discounts as a result of the termination of our free goods program on December 31, 2020. As a result, net revenue from the sales of Afrezza increased by $0.1 million, or 1%, for the three months ended March 31, 2021 compared to the prior year period. Our sales force continues to have varying degrees of access to physicians due to restrictions enacted in response to the COVID-19 pandemic. This limitation on access continued to have an impact on our commercial sales during the three months ended March 31, 2021 and may continue to negatively impact our near-term revenues from Afrezza. Net revenue from collaborations and services increased by $1.1 million, or 13%, for the three months ended March 31, 2021 compared to the same period in the prior year. The increase in collaborations and services revenue was primarily attributed to the UT license agreement and the Vertice Pharma Co-promotion Agreement. See Note 7 – Collaboration, Licensing and Other Arrangements . Commercial product gross profit The following tables provide a comparison of the commercial product gross profit categories for the three months ended March 31, 2021 and 2020 (dollars in thousands): Three Months Ended March 31, 2021 2020 $ Change % Change Commercial product gross profit: Net revenue — commercial product sales $ 8,099 $ 8,000 $ 99 1 % Less: cost of goods sold 4,315 4,164 $ 151 4 % Commercial product gross profit $ 3,784 $ 3,836 $ (52 ) (1 %) Gross margin 47 % 48 % Commercial product gross profit for the three months ended March 31, 2021 decreased by $0.1 million, or 1%, compared to the same period in the prior year. Gross margin for the three months ended March 31, 2021 was 47% compared to 48% for the same period in the prior year. The decrease in gross profit and gross margin was attributable to an increase in cost of goods sold. Cost of goods sold in creased by $0.2 million, or 4%, for the three months ended March 31, 2021 compared to the same period in the prior year, primarily due to $1.2 million of decreased manufacturing activities, which resulted in a reduced amount of costs capitalized to inventory, partially offset by $0.5 million of inventory write-offs and $0.4 million of costs associated with lower product sales, of which $0.2 million is associated with the impact of the termination of the free goods program on December 31, 2020. 29 Expenses The following tables provide a comparison of the expense categories for the three months ended March 31, 2021 and 2020 (dollars in thousands): Three Months Ended March 31, 2021 2020 $ Change % Change Expenses: Cost of goods sold $ 4,315 $ 4,164 $ 151 4 % Cost of revenue — collaborations and services 3,295 3,362 $ (67 ) (2 %) Research and development 2,442 1,755 $ 687 39 % Selling 9,620 8,146 $ 1,474 18 % General and administrative 7,793 6,204 $ 1,589 26 % Asset impairment — 1,521 $ (1,521 ) (100 %) Gain on foreign currency translation (3,838 ) (1,796 ) $ 2,042 114 % Total expenses $ 23,627 $ 23,356 $ 271 1 % Cost of revenue — collaborations and services decreased by $0.1 million, or 2%, for the three months ended March 31, 2021 compared to the same period in the prior year. The decrease was attributable to costs incurred in the prior year period for the Cipla distribution agreement that were not incurred in the current period, partially offset by an increase in costs for the UT License agreement and the Vertice Pharma Co-promotion Agreement. Research and development expenses increased by $0.7 million, or 39%, for the three months ended March 31, 2021 compared to the same period in the prior year. The increase was attributable to personnel costs primarily related to increased headcount for research and development, regulatory and medical affairs. Selling expenses increased by $1.5 million, or 18%, for the three months ended March 31, 2021 compared to the same period in the prior year . The increase was primarily attributable to a $0.8 million increase in personnel costs primarily related to increased headcount for our Afrezza commercial team, $0.3 million in patient support services and $0.3 million in promotional and marketing activities. General and administrative expenses increased by $ 1.6 million, or 26%, for the three months ended March 31, 2021 compared to the same period in the prior year . This increase was primarily attributable to personnel-related costs . An impairment of $1.5 million was recognized for the three months ended March 31, 2020 for a commitment asset related to the future funding commitments of the MidCap credit facility. There were no asset impairments for the three months ended March 31, 2021. Under the Insulin Supply Agreement with Amphastar, payment obligations are denominated in Euros. We are required to record the foreign currency translation impact of the U.S. dollar to Euro exchange rate associated with the recognized gain or loss on purchase commitments. The foreign currency translation gain increased $2.0 million for the three months ended March 31, 2021 compared to the same period in the prior year. Other Income (Expense) The following tables provide a comparison of the other income (expense) categories for the three months ended March 31, 2021 and 2020 (dollars in thousands): Three Months Ended March 31, 2021 2020 $ Change % Change Interest income $ 3 $ 133 $ (130 ) (98 %) Interest expense on notes (5,422 ) (1,071 ) $ 4,351 406 % Interest expense on Mann Group promissory notes (1,030 ) (1,259 ) $ (229 ) (18 %) Other expense (276 ) (4 ) $ 272 * Total other expense $ (6,725 ) $ (2,201 ) $ 4,524 206 % ____________________ * Not meaningful 30 Interest income de creased by $ 0. 1 million , or 9 8 % for the three months ended March 31, 2021 compared to the same period in the prior year, due to lower short-term interest rates . Interest expense increased by $4.4 million for the three months ended March 31, 2021 compared to the same period in the prior year. The increase was primarily due to a $3.7 million milestone obligation that was achieved during the quarter and interest expense from the Senior convertible notes and the MidCap credit facility. Other expense consisted of a loss associated with a foreign currency hedging transaction for the three months ended March 31, 2021 which was entered to mitigate our exposure to foreign currency exchange risks associated with our insulin purchase obligation under the Insulin Supply Agreement. There was no hedging transaction for the same period in the prior year. LIQUIDITY AND CAPITAL RESOURCES To date, we have funded our operations through the sale of equity and convertible debt securities, from the receipt of upfront and milestone payments from certain collaborations, and from borrowings under certain loan arrangements and the sales of Afrezza. As of March 31, 2021, we had $338.4 million principal amount of outstanding debt, consisting of: • $230.0 million aggregate principal amount of Senior convertible notes bearing interest at 2.50% payable semi-annually in arrears on March 1 and September 1 of each year, beginning on September 1, 2021 and will mature on March 1, 2026, unless earlier converted, redeemed or repurchased. The Senior convertible notes are convertible at an initial conversion price of approximately $5.21 per share of Common Stock. The conversion rate is subject to adjustment under certain circumstances in accordance with the terms of the Indenture. • $50.0 million principal amount under the MidCap credit facility, bearing interest at an annual rate equal to one-month LIBOR plus 6.75%, subject to a one-month LIBOR floor of 2.00%, payable in equal monthly installments beginning in September 2022 through maturity in August 2024. • $53.5 million principal amount of indebtedness under the Mann Group promissory notes bearing interest at a fixed rate of 7.00% per annum compounded quarterly and maturing in November 2024, $18.4 million of which is convertible into shares of our common stock at the option of Mann Group at a conversion price of $2.50 per share. Interest is paid-in-kind from August 2019 until the end of 2020, after which we have the option to either pay interest in-kind or in shares. • $4.9 million from a loan under the Paycheck Protection Program of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), all or a portion of which may be forgiven. The PPP loan matures in April 2022 and bears interest at a rate of 0.98% per annum. Principal and interest payments can be deferred up to ten months after the end of a 24-week covered period unless we are notified earlier of our loan forgiveness status. In the event the SBA does not authorize loan forgiveness, the deferred principal and interest will be payable to the lender and we will then make equal monthly payments as required to fully amortize the remaining principal amount by April 9, 2022. In February 2021, we elected to convert the $5.0 million principal amount of 2024 convertible notes into 1,666,667 shares of our common stock in accordance with the terms of the 2024 convertible notes. There can be no assurance that we will have sufficient resources to make any required repayments of principal under the Senior Convertible Notes, the MidCap credit facility, promissory notes or unforgiven amounts of the PPP Loan. The Senior Convertible Notes and Mann Group convertible notes are fully convertible prior to maturity as further disclosed in Note 6 – Borrowings . To date, we have been able to timely make our required interest payments, but we cannot guarantee that we will be able to do so in the future. If we fail to repurchase the Mann Group promissory notes or unforgiven amounts of the PPP loan, we will be in default under the applicable instrument for such indebtedness, and may also suffer an event of default under the terms of other borrowing arrangements that we may enter into from time to time. Any of these events could have a material adverse effect on our business, results of operations and financial condition, up to and including the noteholders initiating bankruptcy proceedings or causing us to cease operations altogether. In July 2013, we issued Milestone Rights to the Milestone Purchasers. The Milestone Rights provide the Milestone Purchasers certain rights to receive payments of up to $90.0 million upon the occurrence of specified strategic and sales milestones, $70.0 million of which remains payable upon achievement of such milestones. See Note 12 – Commitments and Contingencies and Note 6 – Borrowings for further information related to the Milestone Rights. During the three months ended March 31, 2021, we used $12.7 million of cash for our operating activities as a result of our net loss of $12.9 million. The net change in operating asset and liabilities was primarily a result of the recognition of amortization of deferred revenue of $9.0 million, partially offset by an increase in accrued expenses and other current liabilities of $8.3 million. 31 During the three months ended March 31, 2020, we used $11.2 million of cash for our operating activities as a result of our net loss of $9.3 million, the increase in operating assets and liabilities of $5.3 million and non-cash charges of $3.4 million. The increase in operating asset and liabilities was primarily a result of deferred revenue amortization of $8.2 million. Cash used in investing activities of $31.4 million for the three months ended March 31, 2021 was primarily due to the purchase of debt securities. Cash provided by investing activities of $19.9 million for the three months ended March 31, 2020 was primarily due to the proceeds from the sale of treasury bills. Cash provided by financing activities of $225.0 million for the three months ended March 31, 2021 was primarily due to net proceeds from the offering of Senior convertible notes of $222.9 million. Cash provided by financing activities of $0.3 million for the three months ended March 31, 2020 was primarily due to proceeds from at-the-market offerings of $0.7 million, partially offset by the payment of employment taxes related to vested restricted stock units of $0.3 million. Future Liquidity Needs We are not currently profitable and have rarely generated positive net cash flow from operations. In addition, we expect to continue to incur significant expenditures for the foreseeable future in support of our manufacturing operations, sales and marketing costs for Afrezza, and development costs for other product candidates in our pipeline. As of March 31, 2021, we had capital resources of $247.8 million in cash and cash equivalents, $29.0 million in short-term investments, $1.5 million in long-term investments, an accumulated deficit of $3.1 billion and total principal amount of outstanding borrowings of $338.4 million. In March 2021, we issued $230.0 million of Senior convertible notes before offering expenses. In April 2021, we made a $10.0 million principal prepayment against outstanding term loans under the MidCap credit facility and repaid the entire principal amount of $35.1 million outstanding under the Mann Group non-convertible note (together with all accrued and unpaid interest thereon) as further disclosed in Note 6 – Borrowings . As amended, the MidCap credit facility provides a secured term loan facility with an aggregate principal amount of up to $110.0 million, of which $60.0 million remains available for borrowing if the conditions for Tranche 3 are met. We believe our resources will be sufficient to fund our operations for the next twelve months from the date of issuance of our condensed consolidated financial statements included in Part I – Financial Statements (Unaudited) . Off-Balance Sheet Arrangements As of March 31, 2021 and December 31, 2020, we did not have any off-balance sheet arrangements. Contractual Obligations See Note 6 – Borrowings and Note 12 – Commitments and Contingencies for a discussion of material changes outside of the ordinary course of business in our contractual obligations from those disclosed within “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” as contained in the Annual Report. 32